Strong Jobs Report Is Bad News for Inflation, According to Experts

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Despite recent massive layoffs and rate hikes, the November job report blew past expectations — the country added 263,000 jobs for the month. While this is good news for workers, it’s less so for the economy, underscoring that taming inflation is proving more difficult and will require more time, and cementing the Federal Reserve’s hawkish stance.  Some experts worry that the new data might make Fed Chair Jerome Powell reconsider his suggestion just a few days ago that the pace of rate increases might start to moderate as soon as the December meeting — which the market widely interpreted as a smaller rate hike of 50 bps compared to the 75 bps imposed in each of the past four hikes. 

“The November jobs report provides another dose of reality for the markets, which have gotten ahead of themselves on another ‘Fed pivot’ narrative,” said Cliff Hodge, chief investment officer of Cornerstone Wealth.

Hodge added that while the headline payrolls number was strong, the wage data is going to be eye-popping for the Fed, as the 0.6% month-over-month wage growth number matched the highest level all year. 

Higher wages feed into higher inflation, which will no doubt keep pressure on the Fed and should increase expectations for the terminal rate,” he said. 

Just a few days earlier, speaking on Nov. 30 at the Brookings Institute, Powell said that while inflation remains far too high, monetary policy affects the economy and inflation with uncertain lags.

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In turn, he stated, “it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting.”

In November, the Fed unanimously raised interest rates by three-quarters of a percentage point — the sixth consecutive hike — and all eyes were on his speech for hints as to which direction the Fed would be taking at its December meeting. 

But now, the new jobs figure, which is way above the 200,000 Dow Jones estimates, remains “far in excess of the pace needed to accommodate population growth over time — about 100,000 per month by many estimates,” Powell said in his Nov. 30 speech.

“The report is a positive development for the economy and helps support the case that the Fed may be able to achieve a soft landing in the economy, an outcome that’s contrary to predictions made by some of the nation’s largest banks in recent months,” said Peter Essele, head of portfolio management, Commonwealth Financial Network. 

Essele nuanced his statement, adding that one concerning element in the report was the growth in earnings, which, at 5.1%, came in well above expectations. 

“The release sets up the prospect for an aggressive hike of 75 basis points from the Fed later this month, as opposed to the 50 basis points that had been forecasted and expected by markets. The immediate rise in the 10-year Treasury following the release is evidence of a market reaction factoring in a larger hike than previously anticipated,” he said. 

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What about 2023?

While there are some positive signs for the economy — such as the recent gross domestic product data that showed that the U.S. economy grew at an annual 2.9% pace in the third quarter, easing fears of a recession — there are still some persistent inflationary pressures that might keep the Fed hawkish for some time. 

“Two steps forward, one step back, is the non-linear path the economic data resembles as the Fed marches towards their goal of squashing inflation,” said Charlie Ripley, senior investment strategist for Allianz Investment Management, adding that the recent labor market figures were certainly one step back for the Fed.

“While other economic data points over the past few weeks have been favorable to the Fed’s progress on the inflation front, strong employment data is clearly the biggest headwind for the Fed,” he said. “Payrolls need to fall below the replacement rate in order to keep slowing the economy, and despite the aggressive rate tightening thus far, the impact to the labor market has been minimal. Overall, the Fed has made significant steps to slow the economy, but today’s employment report is a sign that they are not out of the woods yet, and we expect additional policy tightening measures to continue into next year.”


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